Latin America: many trading partners, diverse tax implications: newest TEI chapter has big plans for 2015.

• Author: Levin-Epstein, Michael
• Position: Tax Executive Institute

In 2015, the vast majority of U.S. international companies have many markets to choose from, including China, India, Japan, Western Europe, Eastern Europe, Africa, and Canada. Increasingly, however, global firms are looking to market their products, invest in economies, engage in trade, or simply do business with countries in Latin America.

And if corporations are doing business in Latin America, as sure as the sun comes up tomorrow, there will be tax issues.

By any measurement, Latin America, with a population of more than 600 million, is a key trade area for U.S.-based companies. U.S. producers export three times as many products to Latin America than to China. On the other side of the trade equation, Central and South America (excluding Mexico) purchase fifty percent more goods from the United States than China.

Latin America, including Mexico, accounts for between twenty and twenty-five percent of total U.S. trade--imports plus exports. In addition, about twenty percent of foreign direct investment in the region comes from the United States. Exports from South and Central America totaled about $169 billion in 2013. At the same time, imports from Latin America were about $146 billion (see graphic, U.S. Trade with Latin America).

Mexico and Brazil--and Colombia

Who's leading the way in Latin America? Mexico and Brazil are the chief economic powers in terms of GDP, according to most experts. The most important countries in terms of doing business in Latin America are Brazil, due to its burgeoning population (more than 200 million), growing middle class, and continental size; Mexico, due to its border with the United States and role in NAFTA; and Colombia, due to its economic development and expanding economy, according to Lionel Nobre, Latin America tax director at Dell and TEI Latin American founding member (see Member Profile, Page 16).

Paulo Sehn, partner at Trench, Rossi in Sao Paulo, Brazil, agrees that Colombia's importance is on the rise: "Colombia has been increasing its visibility in the region as a result of a stronger economic environment and important reforms, which is also the case for Peru. Meanwhile, Argentina continues to face enormous challenges since the default on its external debt and the somehow excessively regulated internal market that does not foster foreign investments," he says.

In addition, Sehn says, Chile is an important country in the region for its economic and political stability and for showing the highest integration with the international markets in the Latin America region, while Venezuela continues to face enormous economic and political challenges, as operating under the current business environment is quite hostile to foreign investments.

Mexico's proximity to the United States is a major factor in trade relations between the two nations, say Sehn and Nobre. Mexico's shift toward allowing a private sector role in the petroleum sector, which has long been controlled by the government, has been attributed to shale-oil discoveries and improvements in fracking technology in the United States, which has led the way in revitalized trade with our neighbor to the south.

In fact, Latin America as a whole has been the largest foreign supplier of oil to the United States and a key partner in the development of alternative fuels, which has helped make the region our fastest-growing trading partner.

How much free trade is going on among Mexico, Brazil, and the United States? In the significant automobile market, Brazil and Mexico renewed vehicle quotas for four years in March, delaying the implementation of a free trade agreement between the two countries.

The region's two largest economies were scheduled to have free trade in vehicles beginning March 19, and the Mexican government worked for that result. However, Brazil sought a delay, and Mexico agreed.

The countries had allowed free trade in vehicles from mid-2011 to early 2012 but changed to a quota system after Brazil complained that the strengthening of the Brazilian currency over the previous decade made its cars uncompetitive...